If you are a 'DIY' offshore investor read this!
Building an offshore component into an investment portfolio makes sense for every investor. However, “relying on your gut” to haphazardly buy seemingly cheap offshore equities and property in the current context of Covid-19 could turn out to be a costly investment decision.
This is according to Kim Rassou, a Portfolio Manager at Old Mutual Wealth's Tailored Fund Portfolios, who says that the global health pandemic has revived interest in do-it-yourself (DIY) investing. This trend could jeopardise the long-term wealth creation efforts of many South African investors.
"We're seeing a trend of fledgling investors, either looking for investment opportunities or running in fear from the market without understanding the domino effect of the pandemic on market valuations and the underlying forces driving the performance of these companies and/or investment opportunities," says Rassou.
"No economy in the world has been immune to the impact of Covi-19, and professionals across industries are grappling to understand the full extent of the damage seen in excessive market volatility. According to Rassou, off-script investment decisions prompted by an intangible perception of situations — often rooted in fear, greed and vanity — increase the likelihood of an irrational assessment.
"Unlike professionals, DIY investors tend to focus on markets, the economy, the asset manager's performance and even individual stocks and property. They build their portfolios from the bottom up — focusing on investments piecemeal, rather than on how the portfolio as a whole is serving the investment objective," says Rassou.
She says that investors would not necessarily have access to information or the professional insight to understand, for example, the full impact of COVID-19 on various technology stocks. "A seasoned professional will know whether these stocks are currently trading at fair value and have visibility on threats to their supply chain or if they're overpriced or in bubble territory. Investors don't always realise that owning offshore property, for example, often comes with a massive cash obligation, leaving them at the mercy of changes in legislation, economic instability, tax implications and ongoing costs that are often Dollar-Euro hedged."
She says that it is important to point out that these asset classes are not a problem in and of themselves, as they are essential components in principle. "It's about how these asset classes work together to reach a specific objective without creating a concentration risk. Without a plan, investors may inadvertently expose themselves to an unnecessary gamble."
Rassou outlines that one way to avoid this is to follow fundamental investment principles and seek the input of a financial planner who partners with a Discretionary Fund Manager (DFM) before making offshore investment decisions. By working with a DFM, financial planners have access to the expertise and experience of investment professionals who support planners to make informed sound and informed decisions. "Going offshore requires strategic thought and planning. Not only does a financial planner act as a soundboard, but these professionals can help investors with diversification and rebalancing of portfolios," she says.
However, Rassou stresses that successful investing is often about discipline, patience and having the determination not to panic or change the agreed-upon investment strategy based on market volatility. "Whether you are bearish on South Africa or not, the reality is that South Africa represents less than 1% of global investable assets. Limiting your investment universe to pure South African investments limits your opportunity. However, regardless of the market, following an offshore investment plan as opposed to capitulating to knee-jerk impulses could help manage key risks and help clients grow their wealth," concludes Rassou.
Rassou discusses the hallmarks of a sound offshore investment plan:
1. A clear goal
The first attribute of an excellent offshore strategy is a clear goal. This sounds simple, but's that is the north star guiding the client's offshore investment strategy. With the help of an expert, this way, the client is in a better position to build a portfolio that's appropriately structured to meet their specific goals and not the other way around.
2. Risk management
The second principle is to manage risk through the choice of markets invested. Developed and emerging markets, for instance, have different risk profiles and characteristics that influence whether certain markets are more or less of a risk.
The way this may influence investment decisions is that developed markets tend to be highly competitive, efficient and very liquid in such a scenario. A low-cost index strategy might be more suitable for capturing global market performance because of the broad exposure and lower fees.
Emerging markets, by contrast, tend to have more risk concentration and are generally less efficient. Given these risks, stocks that score highly in environmental, social and corporate governance (ESG) criteria are good investment targets. Incorporating ESG considerations could even become a source of outperformance as there is some guidance on how to avoid potential bad apples.
3. Asset allocation
The pros and cons of different geographies considered; the next guiding principle investors need to bear in mind is asset allocation. A well-structured offshore portfolio should be based upon reasonable expectations for risk and returns and diversified sufficiently to limit exposure to unexpected events. The asset allocation exercise is a fine balancing act that aims to escape volatility and short-term losses, while still growing faster than inflation.
Should a portfolio lack investment with higher growth potential, it's likely to fall short of long-term financial goals. What people often forget is that inflation can be particularly damaging because its effects compound over longer time horizons.
The final fundamental that investors need to bear in mind when planning their offshore portfolio is the management and transaction costs involved. Costs create an inevitable gap between what the markets return and what investors earn but keeping expenses down can help narrow that gap.
Markets are unpredictable and cannot be controlled. However, you can manage your costs. Failure to do so can, otherwise, significantly depress a portfolio's growth over the long term.